Remittances after the Crisis: 5 Questions for Economist Dilip Ratha

How were the 215 million people working abroad affected by the 2008 global economic crisis? The short answer is they continued to send a lot of money home. A more complex picture emerges in a new book, “Migration and Remittances during the Global Financial Crisis and Beyond,” edited by World Bank Economist Dilip Ratha, Ohio State Anthropology Professor Jeffrey H. Cohen, and Ibrahim Sirkeci, professor of transnational studies and marketing at Regent’s College in London. The book’s 32 chapters were selected from 300 submissions that flowed in from all over the world in response to a call for proposals on the Bank’s People Move blog. The papers feature economic models and stats—and also regions, peoples, and the humanitarian side of migration. Dilip Ratha, who manages the Bank’s Migration and Remittances Unit, lends insight into the issue.

1. What happened to remittances during the crisis?

There was widespread worry in 2008-09 that remittances would fall. They dipped 5% in 2009—the only global decline in memory—and recovered in 2010 to above 2008 levels. In the past, we had seen remittances go up in response to a crisis in the home country. What was not documented was how remittances would behave when a source country was in crisis. The remarkable finding was that remittances do slow down during a crisis in a source country, but they’re much less affected than declines at the same time of foreign direct investment or private portfolio flows. Even aid flows are very susceptible to crisis and fiscal tightening in developed countries. But remittances are much less so.

2. Why this resilience?

We’re talking about migrants who are very connected to their families. Indeed, the reason people moved in the first place was to send money home. The ties are so strong that they try their best to continue even when they face hardships in their destination country. That willingness is also matched by ability to remit in the face of falling incomes because remittances tend to be only a small part of the migrant’s income. Because of that, one could cushion the fall by cutting consumption and sharing accommodations with others in order to send money home.

The more diversified the geographic destinations of a country’s migrants, the more resilient remittance inflows. Migrants from South Asian countries—India, Pakistan, Bangladesh, Philippines—are all over the place: in the U.S., Europe, the Gulf countries, the Middle East, in large numbers. And because the economic cycles of these countries are not synchronized, the diversification of migrant destinations helped cushion the flow of remittances. Despite the crisis, remittances to Bangladesh and Pakistan were growing at double-digit rates. That was remarkable.

Finally, when there is a small depreciation of the currency—because crisis is often accompanied by changes in exchange rates—the same amount of remittances in local currency terms could be maintained with fewer dollar remittances. We found, however, that when there was double-digit depreciation of the currency, remittances surge. That is because goods and assets—particularly real estate—back home suddenly become cheaper by 20% or 30% in foreign currency terms. So there is a surge of remittances, but this time motivated for investment purposes.

3. What about reports that migration is slowing, especially from Mexico to the United States?

Immigration controls tightened in the U.S. and Europe—indeed all over the world to protect jobs for natives, or rather to be seen as protecting jobs for natives. It’s true tighter immigration controls have meant lower flow of new migrant workers. In the case of Mexico, new migration was supposed to have fallen significantly. Initially it was a 40% fall, then around a 60% fall, and more recently we have heard new migration flows are almost 0 from Mexico to the U.S. But net migration never became negative, because people already in the US did not go back to Mexico as they used to go back before the crisis, for fear of not being able to come back. That was an unexpected finding from the crisis experience.

4.What about migration within countries?

Domestic migration is estimated at around 700 million people—compared with estimates of international migration at 215 million. So domestic migration is a much bigger phenomenon, and its impact on sheer, abject poverty is probably much larger. That is because the poorest of the poor are only able to migrate domestically. They migrate from rural areas to towns and cities to find jobs. This is expected as countries grow and agriculture becomes less dominant in the economy. Economic development and urbanization go together and that inevitably leads to rural-urban migration.

5. What is happening now?

This year international remittances are expected to touch $400 billion, up from $372 billion in 2011.

One of the most surprising findings of the last few months is a doubling in remittances to Egypt in the last couple of years. Remittances earlier were just barely larger than the revenue from the Suez Canal. Now they are nearly double. And that happens at a time of crisis there. One part of the story is the desire of people to help families back home, but that desire was there before and we haven’t heard of large-scale out-migration from Egypt. It seems likely there is more money going into Egypt as remittances because asset prices have fallen significantly.

Pakistan is expected to receive more than $14 billion in remittances this year, about the same size as the country’s foreign exchange reserves. But remittances are typically grossly underestimated in Pakistan. A more recent estimate is $20 billion.

Remittances to India were about $64 billion last year. There is a reversal of capital flows more recently to India—international reserves have fallen by over $20 billion in the last few months. At this time, remittances are rushing into the country, indeed because of the weakening rupee that makes Indian assets attractive to non-residents. Remittances to India are expected to rise further in 2012.

Tajikistan is a special case. According to official estimates, it has the highest ratio of remittances to GDP – close to 35%. Unofficial estimates suggest the ratio is more like 50%. Most of these remittances are from Russia and clearly provide a lifeline to that economy.

There are similar examples all over the world. Even in countries like Mexico, where remittances are in the $25 billion range, they are larger than FDI.